¥530 Million Loss Causes Japan to Reconsider its Approach to Cryptocurrencies

¥530 Million Loss Causes Japan to Reconsider its Approach to Cryptocurrencies

On the 26th of January 2018, one of the biggest cyberheists to date was successfully executed in Tokyo. Cryptocurrency exchange Coincheck lost 58 billion yen, or $553 million, in the popular NEM virtual currency to hackers over the course of just 20 minutes. A lot of criticism has been levelled at the exchange, centring on the idea that protection and regulation methods slipped in a rush to attract customers.

In particular, 2 of the main recommendations from Japanese regulating authorities were not followed. These are that exchanges use cold wallets, or hardware that stores cryptocurrencies offline, and multi-signature security systems that break up security keys among multiple users and devices. While Coincheck did neither and finance minister Taro Aso commented in the lower house budget committee that Coincheck’s security lacked “basic knowledge and common sense”, these are not legal requirements. As long as the exchange complies with authorities now and pays its customers back as it has undertaken to do, it should be allowed to keep functioning.

Cryptocurrencies are a brand-new market, and the idea behind their creation was a decentralised and deregulated currency. In practice, however, it has become clear that regulations are required and governments have begun this process. Japan has been widely praised as the first country to regulate cryptocurrency exchanges at a national level, a move that was in sharp contrast with the crackdowns seen in South Korea and China.

Other Cryptocurrency Heists

Perhaps the most concerning aspect of the Coincheck incident is that it is not the first of its kind. South Korea’s strong stance, for example, is a response to a spate of hackings last year including 2 hits on its YouBit exchange, which ultimately resulted in bankruptcy. Mt. Gox, a Tokyo-based exchange handing 80% of global Bitcoin trades, also filed for bankruptcy after losing half a billion dollars’ worth of Bitcoin to hackers in 2014. Experts, including International Monetary Fund managing director Christine Lagarde, also say it is unlikely to be the last.

What Will Happen Going Forward?

Japan’s Financial Services Authority, or FSA, has given Coincheck until the 13th of February to implement better security measures, but the question of what will happen in the future, on a global scale, looms large. As the need for government regulation in cryptocurrencies becomes more apparent, many people are wondering what governmental attitudes and actions will be.

While many say cryptocurrencies can’t be regulated, the international community is worried enough to be discussing this at great length. At the recent World Economic Forum in Davos, Switzerland, many leaders reiterated warnings in the dangers of cryptocurrencies. United States Treasury Secretary Steven Mnuchin highlighted Washington’s concerns that they could be used for illicit activities. The March G20 meeting in Argentina is also set to discuss possible rules for cryptocurrencies.

Certain measures have already been put in place in Japan and other parts of the world. The Seoul government’s new regulations were unveiled in December 2017, requiring virtual currencies to use their real names among other security measures. China has banned initial coin offerings and has taken various steps to shutter cryptocurrency exchanges. Several countries also strongly caution investors that cryptocurrencies are incredibly volatile.

In April 2017 the Japanese FSA became one of the first regulators in the world to require cryptocurrency exchanges to register, and labelled altcoins methods of payment and not actual currencies. Interestingly, all Japan’s measures may have given a false sense of security and prevented due diligence on the part of the exchanges themselves. Japanese law requires operating accounts and customer funds to be separate, and there is now concern that exchanges are not doing enough to ensure that they are.

The complacency of exchanges must not be tolerated, but stronger regulations could also curtail the flexibility that virtual currency users find so appealing. A fine balance needs to be struck and as cryptocurrencies and blockchain technology become more ubiquitous, it seems clear than proper regulation is going to be required. This may not have been the initial ideal of Bitcoin, but it is the way things have developed and what users, analysts and traders need to work with now.

Alt image text:

Cybercriminals targeting huge sums

Cryptocurrency regulations in the works

Sources:

https://asia.nikkei.com/Spotlight/Bitcoin-evolution/Japan-cryptocurrency-hack-highlights-oversight-challenges

https://www.cnbc.com/2018/01/29/after-500-million-japan-cryptocurrency-theft-heres-how-to-keep-yours-secure.html

https://www.reuters.com/article/us-japan-cryptocurrency/japan-raps-coincheck-orders-broader-checks-after-530-million-cryptocurrency-theft-idUSKBN1FI06S

https://www.marketwatch.com/story/heres-how-the-us-and-the-world-are-regulating-bitcoin-and-cryptocurrency-2017-12-18

 

http://fortune.com/2018/01/29/japan-coincheck-cryptocurrency-hack/

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